Commissioner of Internal Revenue vs. Avon Products Manufacturing, Inc.

Tax assessments issued in violation of a taxpayer’s administrative due process rights are null and void. The Commissioner must consider the taxpayer’s defenses and evidence and render a decision stating the facts and law; failure to do so renders the assessment void. A collection letter with a character of finality may constitute the Commissioner’s final decision on a disputed assessment, appealable to the Court of Tax Appeals.

Avon Products Manufacturing, Inc. is a taxpayer that filed its 1999 Value Added Tax Returns and Monthly Remittance Returns of Income Tax Withheld. The Commissioner of Internal Revenue is the official tasked under the 1997 National Internal Revenue Code to assess and collect internal revenue taxes. Section 228 of the Tax Code and Revenue Regulations No. 12-99 prescribe the due process requirements for deficiency tax assessments, including written notice of the law and facts and an opportunity for the taxpayer to protest and submit evidence. Revenue Memorandum Order No. 20-90 governs waivers of the defense of prescription, while Republic Act No. 9282 and the 2005 Revised Rules of the Court of Tax Appeals define the CTA’s jurisdiction over disputed assessments.

Avon Products Manufacturing, Inc. filed its Value Added Tax Returns and Monthly Remittance Returns of Income Tax Withheld for taxable year 1999 on various dates in 1999 and January 2000. It signed two Waivers of the Defense of Prescription dated October 14, 2002 and December 27, 2002, which expired on January 14, 2003 and April 14, 2003, respectively. On July 14, 2004, Avon was served a Collection Letter dated July 9, 2004 requiring payment of P80,246,459.15, broken down into deficiency income tax, excise tax, VAT, withholding tax on compensation, and expanded withholding tax for 1999. These were the same deficiency taxes covered by the Preliminary Assessment Notice dated November 29, 2002, which Avon received on December 23, 2002.

On February 14, 2003, Avon filed a letter dated February 13, 2003 protesting the Preliminary Assessment Notice. Without ruling on the protest, the Commissioner prepared the Formal Letter of Demand and Final Assessment Notices, all dated February 28, 2003, which Avon received on April 11, 2003. Except for the amount of interest, the Final Assessment Notices were the same as the Preliminary Assessment Notice. On May 9, 2003, Avon protested the Final Assessment Notices, resubmitting its protest to the Preliminary Assessment Notice and adopting the same as its protest to the Final Assessment Notices. A conference was allegedly held on June 26, 2003, where Avon informed the revenue officers that all documents necessary to support its defenses had already been submitted. Another meeting was held on August 4, 2003, where Avon showed the original General Ledger Book as directed. During these meetings, the revenue officers allegedly expressed that they would cancel the assessments resulting from the alleged discrepancy in sales if Avon would pay part of the assessments. On January 30, 2004, Avon paid portions of the Final Assessment Notices: disallowed taxes and licenses/Fringe Benefit Tax adjustment of P153,559.37 and Withholding Tax on Compensation - Late Remittance of P32,829.28.

In a Memorandum dated May 27, 2004, the Bureau of Internal Revenue’s officers recommended enforcement and collection of the assessments on the sole justification that Avon failed to submit supporting documents within the 60-day period required under Section 228 of the Tax Code. The Large Taxpayers Collection and Enforcement Division thereafter served Avon with the Collection Letter dated July 9, 2004. Avon asserted that even the items already paid on January 30, 2004 were still included in the deficiency tax assessments covered by this Collection Letter. In a letter to the Deputy Commissioner for Large Taxpayers Service dated and filed on July 27, 2004, Avon requested reconsideration and withdrawal of the Collection Letter, arguing that it was devoid of legal and factual basis and premature because the Commissioner had not yet acted on its protest against the Final Assessment Notices. The Commissioner did not act on Avon’s request. Avon was constrained to treat the Collection Letter as denial of its protest. On August 13, 2004, Avon filed a Petition for Review before the Court of Tax Appeals, and on August 24, 2004, it filed an Urgent Motion for Suspension of Collection of Tax.

The CTA later found that there was no undeclared sales/income in the amount of P62,911,619.58 per ITR for taxable year 1999; that Avon’s liability for disallowed taxes and licenses and December 1998 Fringe Benefit Tax payment adjustment totaling P153,559.37 was extinguished by payment; that the discrepancy between ending inventories reflected in the balance sheet and cost of sales represented variance/adjustments on standard cost to actual cost allocated to ending inventories and not under-declaration; that Avon’s claimed tax credits of P203,645.89 were disallowed as unsupported by withholding tax certificates, but P140,505.28 was upheld as a proper deduction; and that the deficiency excise tax assessment was deemed cancelled and withdrawn in view of Avon’s Application for Abatement and corresponding payment. These factual findings, particularly the absence of under-declaration of sales, were relevant to the Supreme Court’s due process analysis because Avon had submitted the evidence from which the CTA reached them.

• CIR (Petitioner in G.R. Nos. 201398-99) — Estoppel from Assailing Waivers: The Commissioner asserted that Avon is estopped from assailing the validity of the Waivers of the Defense of Prescription because it paid the other assessments that these waivers covered.
• CIR (Petitioner in G.R. Nos. 201398-99) — Prescription and Finality: The Commissioner averred that Avon’s right to appeal its protest before the Court of Tax Appeals had prescribed and that the assessments had attained finality.
• CIR (Petitioner in G.R. Nos. 201398-99) — Tax Liability: The Commissioner maintained that Avon is liable for the deficiency assessments.
• Avon (Petitioner in G.R. Nos. 201418-19) — Denial of Due Process: Avon argued that the assessments are void ab initio due to the failure of the Commissioner to observe due process from the start up to the end of the administrative process, ignoring all of its protests and submissions.
• Avon (Petitioner in G.R. Nos. 201418-19) — Lack of Factual Basis: Avon asserted that the assessments were not based on actual facts but on erroneous presumptions of the Commissioner.
• Avon (Petitioner in G.R. Nos. 201418-19) — Administrative Due Process Requirements: Avon submitted that a fundamental part of administrative due process is the administrative body’s due consideration and evaluation of all evidence submitted by the affected party, and that Section 228 of the Tax Code and Revenue Regulations No. 12-99 prescribe compliance with due process through all four stages of the assessment process.
• Avon (Petitioner in G.R. Nos. 201418-19) — Identical Notices and Ignored Submissions: Avon claimed that the Commissioner issued identical Preliminary Assessment Notice, Final Assessment Notices, and Collection Letters without considering Avon’s submissions or its partial payment, and that it was not accorded a real opportunity to be heard.

• Avon (Respondent in G.R. Nos. 201398-99) — No Estoppel: Avon countered that it did not receive any benefit from the waivers; there was a drastic increase in the assessed deficiency taxes when the alleged sales discrepancy was increased from P15,700,000.00 in the preliminary findings to P62,900,000.00 in the Preliminary Assessment Notice and Final Assessment Notices; and it was compelled to pay a portion of the assessments in compliance with the revenue officer’s condition in the hope of cancelling the assessments on the non-existent sales discrepancy.
• Avon (Respondent in G.R. Nos. 201398-99) — Timeliness of Appeal: Avon countered that it acted in good faith and in accordance with Rule 4, Section 3 of the Revised Rules of the Court of Tax Appeals and jurisprudence when it opted to wait for the Commissioner’s decision and appeal it within the 30-day period; the Collection Letter, albeit void, constituted a constructive denial of its protest and the final decision of the Commissioner for purposes of counting the 30-day period; since it received the Collection Letter on July 14, 2004, its Petition for Review filed on August 13, 2004 was timely; and the issue on timeliness was raised only in the Commissioner’s Motion for Reconsideration, so a belated consideration would violate its right to due process and fair play.
• CIR (Respondent in G.R. Nos. 201418-19) — Presumption of Correctness: The Commissioner gave a perfunctory resistance that tax assessments are presumed correct and made in good faith.

• Administrative Due Process: Whether the Commissioner of Internal Revenue failed to observe administrative due process, and consequently, whether the assessments are void.
• Estoppel from Assailing Waivers: Whether Avon Products Manufacturing, Inc., by paying the other tax assessments covered by the Waivers of the Defense of Prescription, is estopped from assailing their validity.
• Prescription and Finality of Assessments: Whether Avon Products Manufacturing, Inc.’s right to appeal its protest before the Court of Tax Appeals has already prescribed, and whether the assessments against it for deficiency income tax, excise tax, value-added tax, withholding tax on compensation, and expanded withholding tax have already attained finality.
• Tax Liability: Whether Avon Products Manufacturing, Inc. is liable for deficiency income tax, excise tax, value-added tax, withholding tax on compensation, and expanded withholding tax for the taxable year 1999.

• Administrative Due Process: Yes. The Commissioner failed to observe administrative due process, rendering the identical Preliminary Assessment Notice, Final Assessment Notices, and Collection Letter null and void under Section 228 of the Tax Code and Revenue Regulations No. 12-99.
• Estoppel from Assailing Waivers: No. Avon is not estopped from assailing the waivers; it received no benefit from them, the assessment increased, and its partial payment was insignificant and made in the hope of cancellation. The RCBC ruling is not on all fours.
• Prescription and Finality of Assessments: No. The waivers were defective, and the Collection Letter dated July 9, 2004 constituted the Commissioner’s final decision; Avon’s appeal filed on August 13, 2004, within 30 days from receipt on July 14, 2004, was timely. The assessments did not attain finality.
• Tax Liability: No. Because the assessments were issued in violation of Avon’s due process rights, they are void; the remaining deficiency income tax under Assessment No. LTAID-II-IT-99-00018 in the amount of P357,345.88 for taxable year 1999, including increments, is null and void and cancelled.

• Administrative Due Process: The Commissioner exercises quasi-judicial power in tax assessment, which requires observance of due process. Section 228 of the Tax Code and Revenue Regulations No. 12-99 require the Commissioner to inform the taxpayer in writing of the law and facts on which the assessment is based; the word “shall” makes this mandatory, and non-compliance renders the assessment void. Administrative due process under Ang Tibay requires, among others, that the tribunal consider the evidence presented and render a decision based on the evidence in the record, with reasons. Avon submitted a Reply to the informal conference, a protest to the Preliminary Assessment Notice, a protest to the Final Assessment Notices, supporting documents, and the original General Ledger. The Commissioner issued identical Preliminary Assessment Notice, Final Letter of Demand with Final Assessment Notices, and Collection Letter without commenting on or addressing Avon’s defenses; the alleged under-declared sales even increased from P15,700,000.00 to P62,900,000.00 without explanation; and the Collection Letter was based on the false premise that Avon failed to submit supporting documents. While the Commissioner is not obliged to accept the taxpayer’s explanations, she must give reasons for rejecting them and the particular facts must appear in the record. The presumption of regularity is disputable and was rebutted by positive evidence of irregularity. The assessments are therefore null and void.
• Estoppel from Assailing Waivers: A Waiver of the Defense of Prescription is a bilateral agreement, and under Revenue Memorandum Order No. 20-90 the Commissioner must furnish the taxpayer a copy of the accepted waiver; this requirement is substantive, not merely formal. The CTA declared the waivers defective. The Commissioner’s reliance on RCBC is misplaced: in RCBC, estoppel arose from the taxpayer’s benefit of a drastic reduction of deficiency taxes and its payment of a portion of the reduced assessment. Here, Avon received no benefit; the assessment increased, and its partial payment was insignificant and made in the hope of cancelling the assessments on the non-existent sales discrepancy. Under Kudos Metal, the BIR cannot invoke estoppel to cover its failure to comply with its own waiver procedures; waivers are strictly construed. Avon is not estopped.
• Prescription and Finality of Assessments: Section 203 gives the Commissioner three years from the filing of the return to assess taxes, extendible under Section 222 by a written agreement. The waivers were defective. Under Section 228, if the protest is denied or not acted upon within 180 days from submission of documents, the taxpayer may appeal to the CTA within 30 days from receipt of the decision or from the lapse of the 180-day period. Republic Act No. 9282, Section 7(a)(2), deems the Commissioner’s inaction a denial, and the 2005 CTA Rules allow the taxpayer to await the Commissioner’s final decision beyond the 180-day period and appeal within 30 days from receipt. RCBC and Lascona hold that the two options are mutually exclusive. Avon opted to await the final decision. The Collection Letter dated July 9, 2004, served on July 14, 2004, demanded payment with a warning of summary administrative remedies and was based on the May 27, 2004 Memorandum; it had the character of finality and constituted the Commissioner’s final decision denying Avon’s protest. Avon’s appeal filed on August 13, 2004 was within 30 days from receipt and was timely. Even if the Collection Letter were not the final decision, it was an act on “other matters” under the NIRC appealable to the CTA under Philippine Journalists. The Commissioner is reminded of her duty under Section 3.1.6 of Revenue Regulations No. 12-99 to render a final decision on a disputed assessment.
• Tax Liability: Because the assessments were issued in violation of Avon’s due process rights, they are null and void. The remaining deficiency income tax under Assessment No. LTAID-II-IT-99-00018 in the amount of P357,345.88 for taxable year 1999, including increments, is null and void and cancelled. The Commissioner’s Petition is denied, and Avon’s Petition is granted.

• Administrative Due Process in Tax Assessments — Under Section 228 of the 1997 NIRC and Revenue Regulations No. 12-99, the Commissioner must inform the taxpayer in writing of the law and facts on which a deficiency tax assessment is based; the taxpayer must be given an opportunity to present its side at each stage; and the Commissioner must consider the taxpayer’s defenses and evidence and render a decision stating the facts and law. Failure to comply renders the assessment void. The Court applied this because the CIR issued identical notices and a collection letter without addressing Avon’s submissions.
• Quasi-Judicial Power of the Commissioner — The Commissioner exercises administrative adjudicatory or quasi-judicial power when assessing taxes, which requires investigating facts, holding hearings, weighing evidence, and drawing conclusions. Due process applies because tax assessments affect proprietary rights. The Court used this to require the CIR to observe due process.
• Ang Tibay Requirements in Administrative Proceedings — Administrative due process requires: (1) opportunity to present case and evidence; (2) tribunal must consider evidence; (3) decision supported by evidence; (4) substantial evidence; (5) decision rendered on evidence in record; (6) independent consideration of law and facts; (7) decision informs parties of issues and reasons. The Court found the CIR violated the second, fifth, sixth, and seventh requirements.
• Presumption of Regularity — A disputable presumption that official duty has been regularly performed; it may be overcome by affirmative evidence of irregularity or failure to perform duty. The Court held it cannot stand against positive evidence that the CIR ignored Avon’s submissions.
• Waiver of Defense of Prescription — A bilateral agreement between taxpayer and BIR extending the period to assess and collect taxes; under RMO 20-90, the taxpayer must be furnished a copy of the accepted waiver; it is strictly construed as a derogation of the taxpayer’s right against prolonged investigation. The Court found the waivers defective and ineffective.
• Estoppel by Partial Payment — A taxpayer may be estopped from questioning the validity of waivers if it obtained a benefit from them and paid a reduced assessment. The Court distinguished RCBC because Avon received no benefit, the assessment increased, and its partial payment was insignificant and made in hope of cancellation.
• Two Options upon Commissioner’s Inaction — Under Section 228, RA 9282, and the 2005 CTA Rules, when the Commissioner fails to act on a disputed assessment within 180 days from submission of documents, the taxpayer may either (1) appeal to the CTA within 30 days after the expiration of the 180-day period, or (2) await the Commissioner’s final decision and appeal within 30 days from receipt. The options are mutually exclusive. The Court held Avon validly chose the second option and its appeal was timely.
• Final Decision on Disputed Assessment — The Commissioner must clearly indicate the final determination on a disputed assessment. A collection letter or demand letter with a character of finality, warning of summary remedies, may constitute the final decision appealable to the CTA. The Court treated the July 9, 2004 Collection Letter as such.

• "Tax assessments issued in violation of the due process rights of a taxpayer are null and void. While the government has an interest in the swift collection of taxes, the Bureau of Internal Revenue and its officers and agents cannot be overreaching in their efforts, but must perform their duties in accordance with law, with their own rules of procedure, and always with regard to the basic tenets of due process." — This opening passage states the core ruling and the balance between tax collection and due process.
• "The right to be heard, which includes the right to present evidence, is meaningless if the Commissioner can simply ignore the evidence without reason." — This passage articulates the deliberative-stage requirement of administrative due process and supports the nullification of the assessments.
• "The facts demonstrate that Avon was deprived of due process. It was not fully apprised of the legal and factual bases of the assessments issued against it. The Details of Discrepancy attached to the Preliminary Assessment Notice, as well as the Formal Letter of Demand with the Final Assessment Notices, did not even comment or address the defenses and documents submitted by Avon." — This passage applies the due process rule to the CIR’s failure to address Avon’s submissions.
• "This Court holds that the Collection Letter dated July 9, 2004 constitutes the final decision of the Commissioner that is appealable to the Court of Tax Appeals." — This passage resolves the timeliness and jurisdiction issue, treating the collection letter as the appealable final decision.

• Ang Tibay vs. The Court of Industrial Relations, 69 Phil. 635 (1940) — Enumerated the fundamental requirements of administrative due process; the Court applied these requirements to tax assessment proceedings and found the CIR violated them.
• Commissioner of Internal Revenue vs. Metro Star Superama, Inc., 652 Phil. 172 (2010) — Held that failure to send a Preliminary Assessment Notice stating the facts and law renders the assessment void; followed in finding the CIR’s assessments void.
• Rizal Commercial Banking Corporation vs. Commissioner of Internal Revenue, 672 Phil. 514 (2011) — Discussed estoppel by partial payment and the two options upon the Commissioner’s inaction; distinguished on estoppel because Avon received no benefit, but its obiter on the two options was applied.
• Commissioner of Internal Revenue vs. Kudos Metal Corporation, 634 Phil. 314 (2010) — Held that the BIR cannot invoke estoppel to cover its failure to comply with waiver procedures; followed in rejecting the Commissioner’s estoppel argument.
• Lascona Land Co., Inc. vs. Commissioner of Internal Revenue, 683 Phil. 430 (2012) — Reaffirmed that a taxpayer may await the Commissioner’s final decision on a protested assessment beyond the 180-day period and appeal within 30 days from receipt; applied to uphold Avon’s appeal.
• Philippine Journalists, Inc. vs. Commissioner of Internal Revenue, 488 Phil. 218 (2004) — Held that the taxpayer must be furnished a copy of the accepted waiver; also recognized that acts on “other matters” under the NIRC may be appealed to the CTA; relied on for both waiver and jurisdiction points.
• Mendoza vs. Commission on Elections, 618 Phil. 706 (2009) — Explained the hearing and deliberative stages of administrative due process and the “duty to give reason”; cited in the due process analysis.
• Saunar vs. Ermita, G.R. No. 186502, December 13, 2017 — Held that administrative bodies must inform themselves of material facts and may not deny a party the opportunity to thresh out substantial factual issues; cited to reinforce the right to a hearing.
• Baguio Country Club Corp. vs. National Labor Relations Commission, 204 Phil. 194 (1982) — Found denial of due process where the tribunal failed to consider evidence submitted by a party; cited by analogy.
• Villa vs. Lazaro, 267 Phil. 39 (1990) — Found denial of due process where the agency ignored documents submitted by the taxpayer three times; cited as similar to the CIR’s disregard of Avon’s submissions.
• Commissioner of Internal Revenue vs. Algue, Inc., 241 Phil. 829 (1988) — Stated that taxes must be collected in accordance with law and that arbitrariness negates the purpose of taxation; cited to emphasize strict procedural compliance.
• Commissioner of Internal Revenue vs. Reyes, 516 Phil. 176 (2006) — Voided an assessment for failure to inform the taxpayer of the law and facts; cited as precedent for voiding assessments.
• Pilipinas Shell Petroleum Corporation vs. Commissioner of Internal Revenue, 565 Phil. 613 (2007) — Voided assessment where the Commissioner failed to issue notice of informal conference and PAN; cited as precedent.
• Sevilla vs. Cardenas, 529 Phil. 419 (2006) — Held the presumption of regularity may be rebutted by evidence of irregularity; applied to reject the presumption in favor of the CIR.
• Oceanic Wireless Network Inc. vs. Commissioner of Internal Revenue, 513 Phil. 317 (2005) — Held a demand letter may be the final decision on a disputed assessment if its language shows finality; cited in treating the Collection Letter as final.
• Commissioner of Internal Revenue vs. Isabela Cultural Corporation, 413 Phil. 376 (2001) — Treated a final notice before seizure as the Commissioner’s final decision on a disputed assessment; cited similarly.
• Commissioner of Internal Revenue vs. Union Shipping Corp., 264 Phil. 132 (1990) — Held the Commissioner should clearly indicate the final determination on a disputed assessment; cited in the finality discussion.
• Carpio-Morales vs. Court of Appeals, 772 Phil. 672 (2015) — Held that the power to promulgate rules of procedure belongs exclusively to the Supreme Court; cited to support the 2005 CTA Rules.
• Metro Construction, Inc. vs. Chatham Properties, Inc., 418 Phil. 176 (2001) — Held the right to appeal is statutory but the mode of exercising it is procedural and may be modified by the Supreme Court; cited in the same context.
• Paat vs. Court of Appeals, 334 Phil. 146 (1997) — Explained exhaustion of administrative remedies; cited to show why Avon’s protest had to be resolved first.
• Edwards vs. McCoy, 22 Phil. 598 (1912) — Stated that the object of a hearing is to have evidence considered; quoted in the due process analysis.
• Commissioner of Internal Revenue vs. Liquigaz Philippines Corp., 784 Phil. 874 (2016) — Held the word “shall” in Section 228 and RR 12-99 makes the requirement of informing the taxpayer of legal and factual bases mandatory; cited.
• Commissioner of Internal Revenue vs. United Salvage and Towage (Phils.), Inc., 738 Phil. 335 (2014) — Held the Commissioner’s powers must be exercised reasonably and under prescribed procedure; cited.

• Section 228, 1997 National Internal Revenue Code — Requires the Commissioner to inform the taxpayer in writing of the law and facts on which the assessment is made; otherwise, the assessment is void. It also allows the taxpayer to protest within 30 days, submit supporting documents within 60 days, and appeal to the CTA within 30 days from denial or lapse of the 180-day period. The Court applied this provision in finding the assessments void for failure to consider Avon’s defenses and evidence.
• Section 203, 1997 NIRC — Provides the general three-year period from the filing of the return to assess internal revenue taxes. The Court cited this as the general rule on prescription.
• Section 222(b) and (d), 1997 NIRC — Allow the period to assess and collect taxes to be extended by a written agreement between the Commissioner and the taxpayer. The Court applied this in discussing the defective waivers.
• Revenue Regulations No. 12-99, Section 3 — Prescribes the due process requirements for the four stages of the assessment process: Notice for Informal Conference, Preliminary Assessment Notice, Formal Letter of Demand and Assessment Notice, Disputed Assessment, and Administrative Decision. The Court found the Commissioner violated these procedures.
• Revenue Memorandum Order No. 20-90 — Requires the Commissioner to furnish the taxpayer a copy of the accepted waiver of the defense of prescription. The Court held the failure to comply rendered the waivers invalid.
• Republic Act No. 9282, Section 7(a)(2) — Provides that inaction by the Commissioner in cases involving disputed assessments is deemed a denial for purposes of allowing the taxpayer to appeal to the CTA. The Court applied this in upholding the CTA’s jurisdiction.
• Rule 4, Section 3(a)(2), 2005 Revised Rules of the Court of Tax Appeals — Clarifies that the “deemed a denial” rule is for purposes of appeal and does not necessarily constitute a formal decision; the taxpayer may await the Commissioner’s final decision beyond the 180-day period. The Court applied this in holding Avon’s appeal timely.
• Article VIII, Section 5(5), 1987 Constitution — Grants the Supreme Court the power to promulgate rules concerning pleading, practice, and procedure in all courts. The Court cited this to support the validity of the 2005 CTA Rules.
• Rule 131, Section 3(m), Rules of Court — Provides the disputable presumption that official duty has been regularly performed. The Court held it was rebutted by positive evidence of irregularity.
• Section 249(B) and (C)(3), 1997 NIRC — Provide for deficiency and delinquency interest. The CTA ordered these, but the Supreme Court cancelled the remaining assessment, including increments, because the assessment was void.
• Section 229, Old Tax Code; Section 11, Republic Act No. 1125 — The old provisions on protesting assessments and CTA jurisdiction, amended by Republic Act No. 8424 and Republic Act No. 9282. The Court discussed these to explain the 180-day rule.
• Section 3.1.6, Revenue Regulations No. 12-99 — Requires the Commissioner’s decision on a disputed assessment to state the facts, law, rules and regulations, or jurisprudence on which it is based; otherwise, the decision is void. The Court reminded the Commissioner of this duty.

Justice Peralta (Chairperson), Justice A. Reyes, Jr., and Justice J. Reyes, Jr. concurred. Justice Gesmundo was on official leave.